What I’m Watching This Week – 24 February 2014

The Markets

Domestic equities had a mixed week. The small-cap stocks of the Russell 2000 managed to reclaim positive territory for the year while the Nasdaq continued to lead the pack year-to-date. The large caps didn’t fare quite as well, though the S&P 500 has now managed to erase all but 12 points of the 5.7% it had lost since January 15.

Last Week’s Headlines

January’s dismal weather across much of the country helped cut housing starts by 16% and building permits for future construction by 5.4%, according to the Commerce Department. The worst declines were seen in the Midwest, while starts actually rose in the Northeast.

Consumer prices rose 0.1% in January, according to the Bureau of Labor Statistics, largely because of home energy demands connected to the brutal winter over much of the country. The BLS said the 1.8% increase in the cost of electricity was the biggest since March 2010, while natural gas and heating oil also were up sharply. Wholesale prices rose 0.2% during the month; that was a slight acceleration from December and put the year-over-year increase at 1.2%.

Home resales didn’t escape winter’s ill effects. According to the National Association of Realtors®, weather plus higher mortgage rates and the ongoing shortage of homes for sale brought January sales down 5.1% during the month to their lowest level since July 2012. Sales also were 5.1% lower than the previous January.

China’s manufacturing sector shrank for the second straight month, according to February’s Markit/HSBC Purchasing Managers’ Index, which fell to 48.3 (any number below 50 represents contraction). However, the extended Lunar New Year festival traditionally has slowed manufacturing there at this time of year. U.S. manufacturing reports also showed a decline. The Philly Fed survey fell from 9.4 in January to -6.3, and though the Fed’s Empire State survey remained positive at 4.5, it was down 8 points for the month.

A report by the Congressional Budget Office assessing the impact of an increase in the minimum wage found that while higher pay for 16.5 million workers would lift anywhere from 300,000 to 900,000 families above the poverty line, it also could also mean some job losses. The CBO estimated that a $9 minimum wage could cut an estimated 200,000 jobs (less than 0.1%), while a $10.10 minimum wage–the level proposed by President Obama–could result in an estimated 500,000 fewer jobs (or 0.3%).

The International Monetary Fund warned that emerging-market economies need to continue tightening their monetary policies to combat the impact of tighter money in the developed world. It also urged the eurozone to implement new lending programs and lower interest rates to fight inflation that is so low that it raises the risk of turning into deflation.

Minutes of the Federal Reserve’s monetary policy committee’s most recent meeting suggested that investors could soon begin hearing guidance about when and how the Fed will begin raising its target interest rate.

The Federal Communications Commission said it will try once again to write rules that prevent broadband Internet providers from blocking or slowing access to certain customers. The FCC’s so-called “net neutrality” regulations were overturned by a federal appellate court ruling last month that would allow broadband companies to charge content providers higher rates for faster service.

Facebook stunned the tech community by agreeing to pay $19 billion in cash and stock to acquire mobile messaging startup WhatsApp (after having previously turned down one of the company’s founders for a job). The deal was reported to be the largest tech merger since the AOL-Time Warner deal in 2001. WhatsApp in turn stunned its roughly 450 million users by undergoing a three-hour outage just days later.

Eye on the Week Ahead

In light of recent weaker Fed manufacturing reports, the Commerce Department’s report on durable goods orders for January could be closely watched. Final numbers for U.S. economic growth in both Q4 and all of 2013 also will be available.